Bumitama Agri (BAL SP) - 3Q16 FFB Production Improves qoq And yoy

BAL’s strong FFB nucleus production growth of 1.3% yoy and 48.4% qoq in 3Q16 were within our expectation.

Nucleus FFB production improved significantly qoq as FFB yield recovered from stress and yoy partly due to new mature areas.

We still forecast FFB production to fall 4.4% yoy in 2016, supported by an expectedly strong pick-up in production in 4Q16.

Maintain BUY. Target price: S$1.25.

WHAT’S NEW

3Q16 production within expectation.

Bumitama Agri’s (BAL) nucleus fresh fruit bunch (FFB) production soared 48.4% qoq as it entered the peak production period. Nucleus FFB production increased 1.3% yoy, supported by new mature areas. Management is expecting 16,000ha to come to maturity in 2016.

For 9M16, nucleus FFB production fell10.7% yoy. FFB purchases from external parties also dropped 12.8% yoy in 9M16 as sourcing for third-party FFB became more difficult as the lagged impact from the drought impacted the sector.

3Q16 earnings likely to be up qoq but down yoy.

We forecast 3Q16 net profit of Rp170b-190b (2Q16: Rp107.7b, 2Q15: Rp199.8b). We see better qoq growth for 3Q16 on the back of stronger FFB production but CPO prices are likely to stay flat qoq.

Despite the substantial yoy increase in CPO prices, 3Q16 net profit yoy growth is likely to be lower mainly due to the low yoy production and higher depreciation. BAL will announce its 3Q16 results on 15 Nov 16.

STOCK IMPACT

CPO production higher qoq but still lower yoy.

In line with the increase in FFB production, total CPO production increased 24.9% qoq in 3Q16. However, CPO production was down 8% yoy in 3Q16 due to lower external crop intake. For 9M16, CPO production dropped 12.7% yoy.

Maintain FFB production growth estimates.

For 9M16, nucleus FFB production dropped 10.7% yoy. Nevertheless, we maintain our nucleus FFB production growth to fall 4.4% yoy in 2016 as we expect a stronger production recovery in 4Q16 on the back of new mature areas as well as its young oil palm trees approaching prime age.

Production peaks in 4Q, accounting 28-33% of full-year FFB production. During our recent discussion with Mr Ling Ah Hong of Ganling Sdn Bhd, we understand central Kalimantan is experiencing higher production recovery in 2H16 vs the other regions. BAL’s producing estates are largely in central Kalimantan.

Expect CPO prices to be flat qoq but higher yoy for 3Q16.

In 3Q16, Indonesia Dumai/Belawan CPO prices were flat qoq, but increased by a significant 30.7% yoy.

Indonesia Dumai/Belawan CPO prices rebounded from the low of US$599/tonne on 12 Jul 16 to the high of US$745/tonne on 17 Aug 16. The swift recovery in CPO prices was mainly due to the tight supply since 1H16 and strong exports from China and India in Aug 16.

Meanwhile, we are expecting stable demand from key importing countries such as China and India as well as for FFB production to continue to pick up in Oct-Nov 16.

All in all, we reckon CPO prices will hover at RM2,400-2,600/tonne in 4Q16. Thus, we maintain our average CPO price forecast of RM2,500/tonne for 2016.

EARNINGS REVISION/RISK

Maintain earnings estimates.

We forecast net profits of Rp920.5b, Rp1,442.8b and Rp1,477.2b for 2016-18 respectively.

VALUATION/RECOMMENDATION

Maintain BUY and target price of S$1.25, based on 15x 2017F PE.

We like BAL for its young tree age profile, which spells strong production, as well as its hands-on estate management which has allowed BAL to consistently deliver high oil extraction rate.

SHARE PRICE CATALYST

Surge in CPO prices. BAL is highly leveraged to CPO prices. A surge in CPO prices will boost its earnings. For every 10% increase in CPO prices from our base case, our EPS forecasts would increase 22%.

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